Maxing Out A 401(k) Is Surprisingly Rare — But May Be Easier Than You Think

Ted

FYI: Reaching the maximum limit for 401(k) contributions (which is $19,000 in 2019 and an additional $6,000 for those 50 and older) is not an easy feat, and only a fraction of investors actually accomplish it. Only 13% of participants maxed out their 401(k) in 2017 (when the limit was $18,000), according to a 2018 Vanguard report about its investors. What’s more, these investors had higher incomes, were older and had longer tenure at their employers. Comparatively, 9.1% of workers whose 401(k) plans are managed by Fidelity Investments reached the cap, up slightly from 9% at the end of 2017 and 8.1% at the end of 2013. Boomers were most likely to max out their 401(k) plans, followed by Generation X, and lastly millennials.
Regards,
Ted
https://www.marketwatch.com/story/maxing-out-a-401k-is-surprisingly-rare-but-may-be-easier-than-you-think-2019-03-05/print

johnN

I did sep-ira at vanguard, very useful, saved so much tax $$, max distributions last yr 55K. interesting you can get private 401K or TSP + SEP-IRA..very happy about little pennies saved in taxations here and there
BUT still not happy about all the tax have to pay extras from div bonds income - think 15% cap gain from all div incomes

my next goals maybe getting DEFINED BENEFITS once find out more info about these programs

Investor

Well, it seems like I am one of those in that 13%. There are a lot of people that earn more than me and yet they hardly have any retirement savings. They are spending like there is no tomorrow.

Old_Joe

When we were in our savings years my wife had a 403b, and we both had IRAs. Neither of us had access to any other savings mode other than (of course) Social Security. We both maxed out our IRAs,and my wife maxed out her 403b (converted to an IRA after her retirement). Any additional spare funds were put into either American Funds or American Century, with no load.

Like Investor, we maxed out whatever was available to us.

JoJo26

Is this surprising to anybody?

When the median household income is around $60k, how can you expect a high % of people maxing out 401(k)s? $18k would be 30% going to retirement savings - just not going to happen.

hank

JoJo26 said:

When the median household income is around $60k, how can you expect a high % of people maxing out 401(k)s? $18k would be 30% going to retirement savings - just not going to happen.

I agree with JoJo on this. Criticizing low-income workers for not maxing-out is reminiscent of Wilbur Ross wondering why all those unpaid government workers didn’t simply obtain a loan.

Couple thoughts: The IRS allows a generous catch-up provision during a worker’s later years if they failed to max out in early years. I learned of it accidentally through an “overheard” conversation at work. It proved a great way to make up for my lackluster contributions earlier. Folks nearing retirement (age 50+) should look into it. Think it depends on your employer’s willingness to allow it. https://www.kiplinger.com/article/retirement/T047-C001-S001-the-rules-for-making-ira-401-k-catch-up-contributi.html

Second thought: It’s hard to tell exactly what % of one’s disposable income maxing out would take. Remember the tax deferral one receives when contributing at work. When I was working, a buck contributed was costing something like 75 cents out of pocket - give or take.

On the other hand, if you include all the other taxes we pay in addition to income tax (sales tax, car & boat licensing fees, property tax, phone tax, gas tax, tax on alcoholic beverages & tobacco, social security tax, etc) than your disposable income is really much lower than first appears. That would make maxing out a really onerous option for lower wage workers. Heck, it could easily take 30% or even 40% of their disposable income.

msf

The catch up provision is similar the "regular" 401(k) limit - it's set by law and the employer can't reduce it.

(In contrast, the "regular" contributions by highly compensated employees may be limited by law if they contribute way more than mere peons. This is to keep the plan fair. But the catch up amount is unconditional; employer cannot reduce it.)

FYI, here's a description of the nondiscrimination rules for high wage earners. It's complicated.
https://www.goodfinancialcents.com/401k-limits-for-highly-compensated-employees/

RisklessInSeattle

Boomers were most likely to max out their 401(k) plans, followed by Generation X, and lastly millennials.

That's OK, we (millennials) are going to have 401(k) sharing.

Investor

@msf You are right. Highly compensated employee is defined by IRS as someone that is making more than $120K and are in the top 20% of the company pay scale.

This of course does not take into account cost of living expenses of the locality. Some while $120k is a lot of money in some places, in some high cost cities it does not leave a lot of disposable income. This limit especially hits people working in smaller companies in these localities.

hmgodwin

I think one thing that some miss is that the lower income folks have less of a need to max out their 401k vs. other options for savings. I'm a single guy who makes a little over 50k. My marginal tax rate is 12% with long term capital gains at 0%. I invest in my 401k only enough to get the full employer match, then turn to fully funding a Roth IRA. At such a low tax rate, I am happy to pay taxes now and not have to worry about such in the future, and I maintain the flexibility to pull the money out, with no fees etc, if some disaster happens. After I fund my Roth IRA, I then simply put any extra money into a regular brokerage account. I would only consider putting more money into a 401k, after I have a sizeable chunk of money in my regular brokerage account.

A married couple making 90k would probably find themselves in a similar situation where maxing a 401k may not be the best option even if the money could be spared.